Growing Trend of Local Cell Phone Taxes and Fees

July 16, 2010

There’s a growing trend among cities in California — and perhaps in other states — to nickel-and-dime customers with increased cell phone taxes, “surcharges” and “fees.” El Segundo and Sacramento are among several California cities that have amended local utilities taxes to cover “modern and emerging technologies in communication,” and Chula Vista is following suit with a similar ballot measure this November.

Tax Foundation intern Ryan Forster writes about the trend in today’s San Diego Union-Tribune:

Federal, state and local surcharges and fees are breaking the bank for wireless consumers. From June 2002 through June 2008, 22 California cities approved requests to extend their public utilities taxes to “modern forms of communication,” i.e., wireless services such as cell phones, Internet access and text messaging services.

What caused this wave of new taxes at the state and local levels? Ironically, a federal tax cut.

In 2006, the IRS released Notice 2006-50 admitting that the previous 3.5 years of taxes it had collected on long-distance service were illegal. So-called bundled services — flat-fee plans offered by wireless carriers that provide both local and long distance service — were exempt from federal taxation.

When California cities realized their public utilities taxes no longer applied to bundled cell phone plans, they swiftly amended their statutes, not only to preserve their revenue streams, but to increase them. …

The purpose of the public utilities tax is to compensate the government for building infrastructure to facilitate utilities such as water, gas and electricity. Cities do not subsidize wireless carriers or intervene in constructing cell phone towers and infrastructure. The important distinction to make is that wireless carriers like Verizon, Sprint and others are not public utilities, nor do they use public utilities. Therefore, local governments in California have no business placing a public utilities tax on a private good.

Read the full commentary.

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